A routine, well-practised project will have a lower contingency reserve than a project breaking new ground. You should adjust your contingency reserve to the risk level identified for the project. This fund is used when encountering unexpected events during the project. To cover risks, add a contingency reserve or buffer to projects, usually a percentage of the project cost and time. These costs are for items that benefit more than one project, and only a proportion of their total cost gets charged to the project. These costs are easily attributed to the project and charged item-by-item. Some examples include: Two cost types concern project managers when creating budgets: direct and indirect costs. It is easy to miss some required tasks and activities that throw the budget out later.
YOU NEED A BUDGET COST FULL
This approach is sometimes called participative budgeting for this reason.Ī disadvantage of the bottom-up budgeting approach is the difficulty in getting a full list of tasks and activities needed to complete the project. It is helpful for team morale because the project manager involves the team in budget creation. The advantage of the bottom-up budgeting approach is its accuracy (as long as you have not missed any task or activity). In this approach, you calculate each work package's direct and indirect costs. The project is based on the lowest-level work packages and rolled up to arrive at the total project cost. The team, often involving the budget holder, identify the tasks and activities needed to complete the project. There is a risk of deliberately low budgets getting created with the belief that it will encourage cost savings. If they do not, conflict may occur when a person required to execute the project is given an unrealistic budget that is insufficient to deliver the project. The advantage of the top-down budgeting approach is that it focuses on achieving the project within the budget allocated and leads to efficiencies and reduction in wasteful practices.Ī disadvantage of the top-down budgeting approach is that it assumes that the person creating the budget has enough knowledge and expertise to make a reasonable cost estimate. Prior experience from other projects will play a part in validating the budget allocation for work packages. A project manager should ask whether the budget looks realistic based on experience from past projects. Keep in mind that this approach is more than guessing you need to explain how you will do the work within the allocated amount of budget for each work package. This amount gets divided between the work packages. Often, senior management decides how much a project should cost.
Let's take a look at each approach in more detail. As a project manager, you will face both at some time in your career. Bottom-up approach: estimating the project's total cost by costing the lowest-level work packages and rolling them up.īoth approaches have their advantages and disadvantages.Top-down approach: deciding how much the project will cost and dividing the cost between the work packages.There are two approaches you can take when creating a budget: It can be a daunting task, especially for new project managers however, once you have created your first budget, you will have an approach to use, and it will become easier for future projects. Project managers are accountable for their budget estimates, and with so much uncertainty in projects, it can be one of the project managers' most significant challenges.Ĭreating an accurate budget is an essential skill for a project manager. It isn't easy to know how much it will cost when starting a project.
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